This post and topic is a pretty straight forward concept. A HELOC is a home equity line of credit. In essence, it’s a second mortgage borrowed against the amount of equity in your home. I have another post committed to EQUITY that may give a bit more detail.
BASIC MATH TIME
I am certainly not a math or finance teacher, but the idea of equity and a HELOC isn’t a particularly tough idea to grasp. A basic formula to determine equity; Value-Amount Owed=Equity. If your home worth $300k and you owe $200k, you have $100k in equity. Banks will issue a line of credit for that value.
USES OF THE HELOC
Common uses by home owners would be for repairs and improvements on the home. Some owners may use the line of credit to do additions and updates on the home that actually make the home more valuable. An updated kitchen or room addition may make the home more valuable and increase the equity in the home.
Be careful….Some owners will use the money for vacations, cars and debt consolidation. This places a lien against your greatest appreciating asset. If you are using it to purchase something that goes down in value, you are hurting your financial standing.
It may also seem like you are doing a good thing to use your equity to pay off debt and credit cards, if you don’t actually change the habits that got you into debt, you are putting your home (and family) at great risk. You can’t continue to dig a hole in order to fill in another one.
WHAT HAPPENS WHEN I SELL
When we go to list your home in the future, any lines of credits will have to be paid off at closing. This will take away from your proceeds and you will need to have enough equity to cover the ADDITIONAL FEES associated with selling your home such as taxes and commissions. If there’s not enough funds available after closing out the HELOC you will need to bring money to the closing table in order to sell your home.
In a real estate market like we are in now, where homes are appreciating quickly, it may seem like a good idea to borrow against the equity, but when the market corrects, you could quickly be upside down in your home and stuck without the ability to sell. The ultimate goal of home ownership is to have free and clear title and own the home outright. A HELOC prevents you from getting there.
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Rose and Womble Real Estate
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